By Andria Cheng

Bloomberg

Amazon’s recent statement that it’s contemplating raising the price of its free-two-day-shipping membership program by $20 to $40 from its current $79 annual rate has ignited a firestorm of sorts and led to a UBS stock downgrade on Wednesday that cited concern that a significant percentage of existing Prime members won’t renew at a higher price level.

Instead of debating the magnitude of the Prime price hike, it may be time for Amazon
/quotes/zigman/63011/delayed/quotes/nls/amznAMZN to unbundle the 9-year-old program, argues Rafi Mohammed, a pricing-strategy consultant and author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow,” in an article in Harvard Business Review. He suggests Amazon look at cellphone companies that offer variable pricing based on consumer usage levels.

“The key lesson in pricing for any company is to understand that customers are different,” he said in an interview with MarketWatch, adding that Prime membership is a key marketing tool for Amazon, with Prime-member purchases representing about 36% of Amazon’s $74 billion in annual revenue. “There’s so much more to pricing instead of a simple two-lever, up-and-down strategy. There’s a lot of ways you can slice that pricing. Let people self-select the shipping and pricing option. The notion of offering customer choices is something that becomes standard in all industries. Most companies should offer good, better and best prices.”

Mohammed offered the example of Red Lobster, whose bottom line was seriously damaged when it offered an Endless Crab promotion in 2003, as a cautionary tale for companies offering any unlimited plan.

“You are seeing overconsumption,” Mohammed told MarketWatch. “The problem with raising the price is some of the people who aren’t shipping as much are going to say [they] are going to get out of it.”

He, for one, said he may not renew his Prime membership if the company does raise the price.

Mohammed said Amazon should also consider unbundling the video-streaming and Kindle digital-book borrowing services from the Prime membership.

“It’s just not intuitive” to offer those additional services under the Prime umbrella, he said, adding that there’s no evidence that existing Prime members use all those features. They “certainly provide more value and [that] makes it more attractive to customers,” he said, but “you can still offer low-price video streaming and Kindle book lending. You can make them the most bare-bones. [Amazon can] find a lower-price option.”

According to the UBS survey, executed in partnership with Consumer Intelligence Research Partners, 94% of Prime customers said they would likely renew their membership at the current $79 level, but the percentage falls to 58% and 24%, respectively, with the annual price lifted by $20 and $40. The survey also showed 69% of those Prime members who are frequent users of the Amazon Prime Instant Video service would definitely or probably renew at the $99 level, versus 58% within the broader pool of Prime customers surveyed.

The survey also showed 74% of former Amazon Prime members cited cost as the reason for not renewing their membership, while 12% mentioned their usage patterns.

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About Behind the Storefront

Behind the Storefront is a blog about all things retail. It’s aimed at investors, shoppers and anyone else with a passion for learning about what drives consumer behavior. Hosted by Andria Cheng, Behind the Storefront will cover the business, brands and shopping behavior that’s behind some of the biggest companies, and largest employers, in the world. You can reach Andria at Acheng@marketwatch.com.